Tax year end planning

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Tax year end planning 

With the end of the tax year on the horizon, now is a good time to make sure your clients have used their allowances for 2024/25. Here, we look at some of the valuable exemptions, allowances and planning opportunities that may be available before 6 April.

It’s a good idea to consider the practical aspects of these opportunities. If requests and applications can’t be processed in time, this could result in pension contributions or disposals happening in the new tax year. This could have wider tax implications.

You can take a look at our information on end of tax year arrangements for 2024/25 dates news article - for key dates to be aware of.

 

Pension planning

With the announcement to bring pension death benefits into the scope of inheritance tax from April 2027, pensions could become less valuable for wealth transfer, but they remain the primary savings vehicle for retirement. There remain a number of tax advantages with contributing to pensions that are not available with other investments.

• Pension contributions and the annual allowance
• Tax advantages of pension contributions
• Last chance to apply for an increased lump sum allowance

Have your clients used their annual allowance, and used their pension contributions to their benefit?

Pension contributions and the annual allowance

Clients can contribute up to their net relevant earnings, or £3,600 gross (if higher), into a pension and benefit from tax relief. Contributions above the annual allowance, which for most is £60,000, will result in an income tax charge. Remember, dividend income is not counted as part of net relevant earnings, so clients who mainly draw dividends may not have the net relevant earnings to use their annual allowance in full.

Some clients, such as Directors, may be able to arrange employer contributions, which are not restricted to a clients’ net relevant earnings, to use their annual allowance. There are benefits to this:

• Employer contributions are deducted as an expense before calculating business profits, providing they meet the ‘wholly and exclusively’ test.
• Employer contributions could be more tax efficient, both by being deductible as business expenses and clients aren’t paying income tax or national insurance on the income before paying personal contributions.

Jason is a Director and draws a salary of £12,570, and dividends of £35,000. He can make personal contributions into a pension of £12,570 gross (£10,056 net), this being his net relevant earnings. And providing it would meet the ‘wholly and exclusively’ test, he could then arrange for employer contributions of up to £47,430, bringing his total pension contribution to £60,000. This also reduces business profits by £47,430. If the test is not met, his employer might not get tax relief.

Any personal or employer contributions in excess of a client’s annual allowance (after carry forward) are added to a client’s taxable income for the year. This additional tax charge may be paid by deducting benefits from pension schemes, which can be arranged after the tax year ends.

• Reminder – clients who applied for fixed protection and enhanced protection before 15 March 2023 can contribute to pensions without losing their protection.

Carry forward

Your clients may be able to carry forward any unused annual allowances from the previous three tax years and add these to the annual allowance for the current tax year. This means that for the 2024/25 tax year, up to £200,000 could be contributed without breaching the annual allowance - £60,000 for 2024/25 and 2023/24, and £40,000 from 2022/23 and 2021/22.

Remember, pension contributions in those three years will limit the amount of carry forward available. If the annual allowance was exceeded in any of those three years, you need to look at the three years preceding that tax year to see if the annual allowance from those years was used or already carried forward to a previous tax year.

Any available carry forward from the 2021/22 tax year will be lost if it is not used in the 2024/25 tax year.

And clients can’t carry forward relevant earnings from previous tax years to increase earnings in the current tax year.

Tapered annual allowance

Higher earners may have their annual allowance reduced if their adjusted income exceeds £260,000 and threshold income exceeds £200,000. There are a number of checks to validate if the taper applies, but this can see the annual allowance reduced to £10,000. You can find out more about the tapered annual allowance.

Carry forward can be used where the taper applies, but you should also consider:

• Whether the taper applied in previous tax years, and then
• review the contributions in that year to see what remains to be carried forward.

For tax years 2020/21 through to 2022/23, the taper may apply if income exceeds £240,000, and the annual allowance could be reduced to a minimum of £4,000.

Money Purchase Annual Allowance (MPAA)

Anyone who has already taken flexible income, or an uncrystallised funds pension lump sum (UFPLS), will be subject to the money purchase annual allowance of £10,000. Individuals will still have the £60,000 annual allowance (unless tapered) for defined benefit accrual, minus any contributions to money purchase pensions.

It’s not possible to use carry forward to increase the MPAA. However, carry forward can continue to apply to defined benefit accrual. Most of the planning opportunities involve contributions into money purchase pensions, so there are fewer opportunities once the MPAA applies.

Tax advantages of pension contributions

In addition to increasing retirement investment in a tax efficient way, pension contributions reduce your clients' adjusted net income. This can be helpful to:

1. Avoid the tapered annual allowance.
2. Reclaim the personal allowance (avoiding the 60% tax trap).
3. Reduce or eliminate the high-income child benefit charge.

1. Avoid the tapered annual allowance

Personal pension contributions reduce a client’s threshold income. This could reduce your client’s threshold income below £200,000 so that the annual allowance is not tapered, regardless of their adjusted income. If your client’s annual allowance would be significantly reduced because of the taper, then making pension contributions may maintain the annual allowance in full, therefore preventing or reducing an annual allowance charge.

Robert is an additional rate taxpayer with £360,000 adjusted income and £220,000 threshold income, with employer contributions of £40,000.

The adjusted income exceeds £260,000 and threshold income exceeds £200,000 so the taper applies reducing the annual allowance to £10,000.

Employer contributions exceed the taper by £30,000, so an annual allowance charge of £13,500 (45% of £30,000) is due.

Paying a pension contribution of £20,000 gross (£16,000 net) would reduce the threshold income to £200k so the taper does not apply. The annual allowance is retained in full at £60,000. The client’s contributions total £60,000 (£40,000 employer and £20,000 personal), so there is no annual allowance charge.

2. Reclaim the personal allowance (avoiding the 60% tax trap)

Income between £100,000 and £125,140 is taxed at 40%, with an additional effective rate of 20% tax. This is due to the removal of the personal allowance where income moves from being tax free to taxed at 40% - the personal allowance is reduced by £1 for every £2 of income above £100,000. This is referred to as the 60% tax trap. In Scotland, this effective tax rate is 67.5% in the 2024/25 tax year.

If clients pay more into a pension before the tax year end, this will reduce their adjusted net income.

Ted is approaching tax year end and has an adjusted net income of £110,000.

If he takes no action:

• His personal allowance will be reduced by £5,000, therefore an additional £5,000 will be taxed at 40% instead of being tax free.
• The £10,000 in excess of £100,000 is taxed at 40%.
• This results in £6,000 tax from this £10,000 income.

If he pays a further £10,000 gross into a pension:

• Adjusted net income is reduced to £100,000.
• His personal allowance will be retained in full, so the £5,000 shown above will be tax free.
• The £10,000 in excess of £100,000 taxed at 40% is directed to a pension, so the tax and tax relief offset.
• The £10,000 contribution effectively gives 60% tax relief, with £4,000 less in hand after tax.

You should check there won’t be any annual allowance charge if clients make additional pension contributions.

3. High income child benefit charge

If a client (or their partner) is claiming child benefit, then if either have an income in excess of £60,000 (this was £50,000 in previous tax years) a high-income child benefit charge applies.

The charge applies at a rate of 1% for every £200 of income over £60,000. In previous tax years the taper was at a rate of 1% for every £100. Income of more than £80,000 results in the charge recovering all the child benefit. Reducing adjusted net income below £80,000 will reduce the charge, or to below £60,000, will remove the charge completely.

Personal pension contributions reduce your clients’ adjusted net income, so can be used to avoid this charge, and accrue retirement savings at the same time.

Last chance to apply for an increased lump sum allowance

The last date for clients to apply for Fixed Protection 2016 (FP16) and Individual Protection 2016 (IP16) is 5 April 2025. These protections are the last of the lifetime allowance protections that are still available. Either protection secures a lump sum allowance (LSA) of more than £268,275, and a lump sum and death benefit allowance (LSDBA) of more than £1,073,1000.

For FP16, clients don’t need to already have pension savings in excess of £1.25m to apply. Applications on or after 15 March 2023 are still subject to protection cessation events, so contributions for or by the client would cancel FP16. It’s therefore important to review whether an increased LSA and LSDBA is more beneficial than being able to make further contributions which may be needed to take advantage of the standard allowances.

For IP16, clients must have built up pension savings of more than £1,000,000 by 5 April 2016, and can continue to contribute to their pensions without losing the protection.

There are conditions that clients must meet for each protection, and some exclusions depending on whether they already have existing lifetime allowance protections.

Applications should be made online at Gov.uk.

Wider tax planning

• Capital Gains tax
• Inheritance tax
• Individual Savings Accounts
• Savings and dividends

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Capital Gains tax

From 6 April 2024, the CGT annual exempt amount reduced to £3,000 for individuals, and reduced to £1,500 for some trusts. HMRC estimate that up to 260,000 individuals and trusts will be brought into scope for CGT for the first time this tax year.

Additionally, the CGT tax rates were amended from 30 October 2024.Gains for basic rate taxpayers increased from 10% to 18%, and for higher and additional rate taxpayers increased from 20% to 24%. This brought rates into line with non-exempt property which continue to be taxed at 18% and 24%.

With the reduction to the annual exempt amount, and the increased rates of tax, CGT planning has become more important than ever. You may want to consider the following:

• Use of the full annual exempt amount – any unused amount can’t be carried forward to future tax years.
• Gains in this tax year can be offset against any losses, you can claim losses up to four years after the end of the tax year you dispose of an asset.
• Transferring an asset to a spouse/civil partner is exempt from CGT. If the spouse or civil partner isn’t realising any other gains, they could crystalise gains within the annual exempt amount to make full use of both allowances, up to £6,000 this tax year.

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Inheritance tax (IHT)

In the Autumn budget 2024, the Chancellor announced a consultation to bring pension death benefits and unused pensions into the assessment for IHT from April 2027. Clients may have planned to use pensions as an IHT vehicle since pensions are currently exempt from IHT, so this announcement will drive more discussions with clients around long-term IHT planning. While we wait to hear what the final position on this will be, your clients can still take advantage of the current allowances, these include:

• Annual gifts of up to £3,000 per tax year are exempt from IHT. Any unused allowance from the previous tax year can be carried forward one tax year. If it is not used, it will be lost.
• Gifts to spouses, civil partners, charities, political parties, and national organisations are exempt from IHT.
• Regular payments out of income, so long as you maintain your usual standard of living, can help to stop the value of your estate increasing. Withdrawals from an investment bond are regarded as payments of capital and not payment from income.

Larger gifts that exceed the exemptions, known as potentially exempt transfers (PETs), may help to remove larger assets from a client’s estate and become fully tax exempt if a client survives seven years after the gift. With the proposal to bring pensions into scope of IHT, this could add significant IHT costs to estates. As such, the earlier a PET is made the greater the chance it can be fully excluded from IHT.

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Individual Savings Accounts (ISAs)

A number of ISA changes came into effect from 6 April 2024 which may impact financial planning. Clients can now open and pay into multiple Cash ISAs, or Stocks and Shares ISAs, so long as the ISA limit of £20,000 is not exceeded, so clients may be able to find better rates or spread cash to keep it safe.

Any unused ISA allowance can’t be carried forward to future tax years, so you may want to consider maximising your clients’ subscriptions before they’re lost.

If your client has a flexible ISA and they have taken money from it this tax year, they can re-invest the amount withdrawn without affecting their annual subscription amount, provided this is done before the end of the tax year.

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Savings and dividends

The tax-free dividend allowance reduced to £500 from 6 April 2024.

Depending on the tax position of your client, they will be entitled to a personal savings allowance of either £1,000, if a basic rate taxpayer, or £500 if they’re a higher rate taxpayer. An additional rate taxpayer isn’t entitled to this allowance.

Restructuring your clients’ assets can help them to maximise the full use of their dividend and personal savings allowances.

Saving for children

Clients can invest for their children, using a pension for a long-term investment, or using a Junior ISA as a short-to-mid-term investment.

Pensions for children

Children also have an annual allowance, but as a child will rarely have earnings, your clients can usually only pay up to £2,880 into a child’s pension for the 2024/25 tax year. When the 20% tax relief is included, this adds up to £3,600.

Only a parent or guardian can set up a pension for a child, but once it’s up and running, anyone can contribute – parents, grandparents, godparents, friends, or other family members. So, leave time to set this up and then have contributions paid before the end of the tax year.

Junior ISAs

Parents or guardians can setup a Junior ISA (either a cash ISA or stocks and shares ISA) for their children and contribute up to £9,000 per child per tax year. Once setup anyone can contribute to a child’s Junior ISA. This allowance is not carried forward, so use it while you can.

Contributing to either can mitigate IHT liability by reducing the size of your estate. Payments may be covered by the annual £3,000 tax-free gifting allowance, or the exemption for regular payments.